Bear of the Day: Titan International (TWI)
Titan International (TWI), a holding company that owns subsidiaries that supply wheels, tires and undercarriage components for off-the-road equipment used in agricultural, earthmoving/construction and consumer applications, reported weaker-than-expected second quarter results on July 24.
The company is facing headwinds from lower farm income and continued weakness in the mining industry. And this isn't a trend that's likely to reverse anytime soon.
Earnings estimates have plummeted for Titan International over the last couple of weeks, sending the stock to a Zacks Rank #5 (Strong Sell). And with shares trading at a lofty 29x forward earnings, investors should look for a better opportunity elsewhere.
Second Quarter Results
Titan International reported weaker-than-expected second quarter results on July 24. Adjusted earnings per share came in at $0.03, well below the Zacks Consensus Estimate of $0.13. It was down significantly from $0.24 in the same quarter last year.
Net sales fell 12% year-over-year to $523.7 million, well below the consensus of $554.0 million. Sales were down 12% in the Agricultural segment due to decreased demand for large farm equipment as a result of lower farm net income. And sales plunged 21% in the Earthmoving/Construction segment due to decreased demand in the mining industry.
Despite the sales decline, inventories rose 5% from the same quarter last year, driven by a 14% increase in finished goods. And this was even after an inventory writedown of $11.6 million in the quarter 'to adjust the value of mining product inventory to estimated market value'. This could be a sign of further sales troubles for Titan in subsequent quarters.
Estimates Falling
In the company's 10Q, management warned that '[t]he weakness in mining is expected to continue for the remainder of 2014' and that lower farm income could continue to decrease demand for large farm equipment.
Analysts have revised their earnings estimates significantly lower for Titan for both 2014 and 2015. This sent the stock to a Zacks Rank #5 (Strong Sell). The Zacks Consensus Estimate for 2014 is now $0.12, down from $0.38 before the Q2 report. The 2015 consensus is currently $0.49, down from $0.97 over the same period.
You can the dramatic drop in estimates in the company's 'Price & Consensus' chart, a trend that has been occurring for several months now:
And these negative estimate revisions aren't just a company-specific phenomenon. The 'Machinery - Farm' industry ranks in the bottom 6% of all industries based on earnings momentum.
Pricey Valuation
Shares of Titan International are down more than 15% year-to-date, but the stock still doesn't look like much of a value here. TWI trades at 29x 12-month forward earnings, a significant premium to the industry median of 11x. Its price to cash flow ratio of 14x is also well above the industry multiple of 6x.
The Bottom Line
Titan International is facing significant headwinds from lower farm incomes and continued weakness in the mining industry. With declining sales, high inventory levels, falling earnings estimates, and premium valuation, Titan International seems a long way off from a significant turnaround.
Todd Bunton, CFA is the Growth & Income Stock Strategist for Zacks Investment Research and Editor of the Income Plus Investor service.
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